Pre-poll rate cut on the cards

The Bank of England's monetary policy committee is expected to reduce interest rates this Thursday in the face of mounting evidence of a UK economic slowdown. Delay would leave the MPC with the politically delicate decision of whether to cut on the likely election day.

But the doves' attempts to force a larger cut, of 50 basis points, will be undermined by a survey due on Tuesday expected to show strong consumer spending. The British Retail Consortium-KPMG sales monitor for April is expected to show higher sales than for the same month last year. City economists reckon there's a 70 per cent chance of a 25 basis point cut to 5.25 per cent this week.

The MPC cut by 25 basis points in both February and April. Last month the doves wanted a bigger cut, but other members preferred to wait for further evidence of deterioration in the economic prospects before such a move.

Since then, first-quarter gross domestic product figures have shown a sharp slowdown in the economy.

Inflation has persistently undershot the 2.5 per cent target for almost two years, and at the last count, in April, was 1.9 per cent.

The MPC has plenty of scope to reduce rates further. Indeed, the MPC may have to cut to prevent inflation going below the lower bound of 1.5 per cent.

The Chancellor is sufficiently worried about the economic slowdown to have dismissed out of hand suggestions that the inflation target should be lowered to 2 per cent.

Last week, when re-setting the 2.5 per cent target for the coming year, Treasury sources indicated that they were worried a lower target might threaten the MPC's room for manoeuvre, thereby hitting output and jobs.

 George Soros, the financier and philanthropist, has sounded a warning over US economic prospects. He told The Observer: 'I don't think we've seen the worst.'

He warned that though the first phase of the slowdown, an inventory correction, was ending, the second phase - 'a cut in capital expenditure due to a decline in corporate profits' - has not yet fed through to the figures.